Power Integrations, Inc.

Thank you for standing by. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the Power Integration second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your questions, press star one again. Thank you. I would now like to turn the call over to Joe Schiffler, Director of Investor Relations. Mr. Schiffler, please go ahead.

Thank you, Maria. Good afternoon, everyone. Thanks for joining us. With me on the call today are Balu Balakrishnan, Chairman and CEO of Power Integrations, and Sandeep Nair, our Chief Financial Officer. During this call we will refer to financial measures not calculated according to GAAP. Non-GAAP measures for the second quarter of 2023 exclude stock-based compensation expenses, amortization of acquisition-related intangible assets, and the tax effects of these items. A reconciliation of non-GAAP measures to our GAAP results is included in today's press release. Our discussion today, including the Q&A session, will include forward-looking statements denoted by words like will, would, believe, should, expect, outlook, plan, forecast, anticipate, prospects, and similar expressions that look toward future events or performance. Such statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected or implied. Such risks and uncertainties are discussed in today's press release and in our most recent Form 10-K, filed with the SEC on February 7, 2023. Finally, this call is the property of Power Integrations, and any recording or rebroadcast is expressly prohibited without the written consent of Power Integrations. Now I'll turn it over to Balu.

Thanks, Joe, and good afternoon. As expected, our Q2 results marked the start of a recovery from the cyclical trough reached in the prior quarter. While the pace of the recovery reflects a soft demand environment, especially in China, We do expect meaningful revenue growth in the second half of the year compared to the first half as inventories continue to improve and new designs go into production. We also expect significantly higher gross margins and operating margins in the second half. Most importantly, our products are winning in the market and secular trends like energy efficiency, renewable energy and electrification are going strong regardless of the industry cycles. Each of these trends contributes to a lower carbon future, and we are participating in all of them through our presence in renewable energy and electric transportation, energy efficient drivers for brushless DC motors and LED lights, our leading position in GAN, and our expertise in reducing standby power waste. Low standby technology remains as relevant today as ever, thanks to the ever-increasing number of electronic devices drawing power from the grid. And it remains a priority for policymakers who recognize that the cleanest energy is the energy we never used in the first place. With that in mind, EU has recently revised its eco-design standards for standby consumption, and I'll talk more about that in a moment. Second quarter revenues were in line with our guidance at $123 million, up 16% from the prior quarter. Industrial, the last category to enter the cyclical correction, declined slightly. All other categories showed strong sequential growth led by consumer, which grew 35% driven by appliances and air conditioning. Channel inventories associated with the consumer market fell significantly in Q2, and are approaching normal levels. The computer category was up more than 20% sequentially, driven by tablets, desktops, and aftermarket GaN charges. Revenues from the communications category were up high teens sequentially, despite continued softness in the Android market. While revenues from Android customers were essentially flat from the prior quarter, channel inventories continued to be well below normal, And we have received a number of rush orders in recent months from distributors serving Chinese OEMs. Overall, distributor inventories ended the quarter at 10 weeks, down more than a week and a half from the prior quarter, and down about three and a half weeks since the beginning of the year. We expect further reductions in channel inventory in the September quarter. Lower channel inventories should enable continued sequential growth in Q3, though our expectations for September quarter do reflect a weaker near-term demand environment, especially in China. Nevertheless, we are pleased to be past the bottom of the cycle, and we look forward to a disruption of year-over-year growth in the fourth quarter. We believe we are well positioned for growth in 2024. driven not just by cyclical recovery, but also the strength of our product portfolio and an expanding pipeline of design activity. In Q2, we achieved an all-time high in terms of potential revenue value of design opportunities created during the quarter. This reflects the increased breadth of applications we are addressing and rising dollar content in chargers and appliances and superior performance and ease of use of our products. Our flagship InnoSwitch ICs, now in the fourth generation, continue to set the state of the art in power supply technology with the highest level of integration available, including primary and secondary site control and flux link isolation technology, which eliminates optocouplers. InnoSwitch ICs offer a choice of silicon, GaN, or silicon-carbide switches, as well as an integrated USB PD interface for mobile applications removing the need for a separate protocol chip. One of our largest cell phone customers has recently taken advantage of this capability, designing out the USB PD protocol chip in a high volume charger and upgrading to the PD version of the InnoSwitch, driving a substantial increase in our dollar content. We want a wide range of other advanced charger designs in Q2 with GaN InnoSwitch products, as well as our HyperPFS5 GaN power factor correction ICs, including two aftermarket USB PD chargers with 140 watts of output. GaN inner switch devices also won designs in a number of non-mobile applications in Q2, including air conditioners, industrial controls, medical equipment, USB wall receptacles, and surge protectors. Overall, We expect about half of our GAN revenue this year to come from non-cell phone applications. In automotive, we are seeing strong interest in our new 900-volt GAN InnoSwitch products for power supplies in 400-volt passenger cars. In 800-volt vehicles, we are racking up wins with our silicon carbide InnoSwitch products, which are far and away the best solution for 12-volt battery replacement, and emergency power supplies in drive train inverters. A recent Tier 1 design win for emergency power supplies is now ramping with a major European car brand, and we have significant follow-on design activity at the same Tier 1 customer. Two Chinese customers are beginning production with us in Q3, and we expect to be in production with a total of four Chinese car models by the end of this year. In all, our design opportunity pipeline exceeds $100 million, and as we have noted in prior calls, we are converting opportunities into design means at a much higher rate in automotive than any other end market. The transition to brushless DC motors in appliances and high-vac equipment is creating a broad set of opportunities for our bridge switch motor dry products. and our strong incumbent position in appliance power supplies gives us a leg up as sockets become available. In Q2, we grew our opportunity pipeline to more than $60 million and secured our first design in at a major supplier of circulation pumps for radiant heating systems scheduled to begin production in early 2024. Bridge switch ICs not only drive motors more efficiently than computing solutions, but also minimize power consumption of the motor when an appliance is not in use. This capability takes on greater importance in light of Europe's updated eco-design standards, which mandate a reduction in the allowable standby power for a wide range of electronic products beginning in 2025. This is the first major update to standby regulations since 2013 and should provide a tailwind across a broad range of applications as OEMs redesign products to meet the stricter limits. Power integrations have been the leader in reducing standby waste since we introduced our EcoSmart technology 25 years ago. EcoSmart technology all but eliminates standby consumption in power supplies, saving more than 2 million homes worth of electricity usage every year by our estimates. It produces these savings without any loss of functionality for the end user and without added cost or design effort on the part of our customer. In addition to saving standby power with EcoSmart technology and driving higher active mode efficiency with GAN, we also contribute to decarbonization with our scale gate drivers, which drive IGBT and silicon carbide modules in high power applications. We are on track for another year of growth in this business, driven mainly by renewables, where our gate drivers are key components of inverters for wind turbines and utility-scale solar installations. Just as important as generating renewable energy is delivering it efficiently to the grid, and we have recently won a design for a high-voltage DC transmission link connecting a North Sea wind farm to the mainland. This multi-year project, worth millions of dollars in revenues, is scheduled to begin production in the second half of 2024. And while electric passenger cars get most of the attention, we are equally well positioned to benefit from electrification in heavy vehicles and locomotives. We won a high-volume gate driver design in Q2 for a traction inverter at Europe's largest locomotive manufacturer. And we are seeing strong interest from customers in our scale EV driver boards for heavy vehicles such as trucks, buses, and construction equipment. In all, our high-powered business is poised to benefit tremendously in the years ahead as the world drives towards a lower carbon future. With that, I will turn it over to Sandeep for a review of the financials.